Green Room

The Private Option: Consistency Is Sauce for the Gander

Several pundits (I can no longer write “pundants,” with Mr. Bush being gone from the scene) have quipped that if the Democrats are so anxious for a public (government) option in health-insurance reform, arguing that allowing the government to “compete” with private industry reduces cost without damaging quality, then why do they reject a “private option” for Medicare, Medicaid, Social Security, and schooling?

It’s a grand idea; let’s play with it a bit.

The putative government “option” works by allowing employers and perhaps private individuals who buy their own insurance to elect instead to buy the government insurance plan. All right… at the moment, while there are a few private insurance plans contained within Medicare, ordinary people have no option of paying for a private health-insurance plan for their sunset years instead of Medicare; if somebody wants such a plan, it must be supplemental coverage in addition to Medicare, which they also must fund via involuntary taxation — part of the FICA taxes, which you can examine by looking at your W-2. (The self-employed must pay the entire amount directly, as SE tax.)

The same is certainly true for Social Security, paid for by the other part of FICA: You are not allowed, in general, to cease paying your FICA taxes. (There may be some exceptions for people already on government health care or retirement plans.)

Half the FICA tax is automatically deducted from your paycheck; the other half is “paid” by your employer — but in reality, it passes that cost along to you, in the form of reduced salary. Employers certainly count that half of FICA as part of total compensation, just as they count the health insurance they offer; if they didn’t need to make those payments, they would be free to offer that much more to lure the best candidates away from competing businesses.

So if Democrats really like public-private competition, how about this?

Allow citizens to opt out of public Medicare, instead directing their employers to deduct the amount of their Medicare taxes, 2.9% total of all income — and pay it as a defined contribution to a health-insurance plan, selected by the employee, that will pay for medical care in old age. Those who pay SE tax could also opt out, paying that same amount instead into the same kind of plan.

Allow workers to opt out of public Social Security entirely — all 12.4% of taxable wages, not just 4%, as President Bush proposed — by instead having their employers direct the amount of the total FICA tax into a qualified IRA investment plan (same deal for SE tax). The plans would be offered by any broker willing to set them up… which of course would mean all of them, because every major broker already offers such plans.

And of course, allow parents to opt out of paying the portion of their federal taxes that go to government schooling, instead having a tax credit for that amount, which they can put into a special, qualified investment fund — chosen by the taxpayer — that could only be used to pay for non-government schools or for home-schooling. (Because the government would not directly be paying schools, the problem of whether to “fund” religious schools does not even arise, as it does with a voucher system.)

This liberty is trickier, because people must continue to pay these taxes even after their kids are all grown and out of government schooling. Should the opt-outers continue to receive a tax credit for life, based upon what portion of their children’s schooling was supplied by government schools (that is, when they chose to opt out)? Or should the tax credit diminish over time? These questions would be negotiating points to try to gain votes in Congress.

First, each of these is obviously an interim step between the current system of government monopoly and a system of actual liberty and personal responsibility; but we still must take into account that pesky First Rule:

[G]overnments conclude that it’s very bad public policy — political suicide, in fact — to allow people to die of easily treatable injuries, illnesses, and conditions….

Let’s call this the First Rule of Health-Policy Political Reality: If voters have to step over dead bodies to get to the polling place, it affects their vote.

In addition to health care, this rule also applies to standing by and allowing seniors to live in grinding, third-world level poverty, or allowing some parents to refuse to educate their children at all.

In economics, it’s called the “free rider” problem; the classic example is a streetcar with a single driver who is also the ticket-taker, so he really has no ability to extract fares from riders not honest enough to pay voluntarily. These moochers start hopping on the streetcar without buying a ticket; eventually, as more and more people see others riding for free, even ordinarily honest riders start feeling like suckers. When they, too, begin doing the same, the streetcar line goes bankrupt. Then nobody gets the service.

In this case, if we have an unenforced system of health insurance, what happens when somebody without any insurance gets terribly sick or injured — or worse, his child does. Given that Americans will not stand by and watch someone die from an easily treated disease or injury, the reality is that those free riders will, in fact, be treated. Maybe they’ll be billed afterwards, but they can declare bankruptcy and weasel out of even that small bit of personal responsibility.

Similarly, Americans will never countenance senior citizens living on the streets or children growing up illiterate or otherwise uneducated: We have no stomach for willfully forcing people to pay a draconian, perhaps even fatal, price for stupidity… even less for making children pay the price of their parents’ stupidity.

Without some solution to the free-rider problem, we cannot move to a system of full liberty. (I’m not saying it’s insoluble, only that I personally don’t know any solution.) But we can at least significantly pare back government intrusion to the least extent required to still leave nearly everyone covered for old-age health care, retirement, and some standard minimum level of education.

Second, these “private options” would naturally have to take into account that there are three groups of people:

Those who have already retired (Medicare and Social Security) or whose children have finished secondary schooling, thus cannot choose not to partake of the private option.

Those who have not yet begun to pay into the system — primarily children — who have the cleanest choice possible.

And a vast remainder, including those who have already paid taxes for some number of years but haven’t yet used any Social Security or Medicare, or who have children who are part-way through school, or various other combinations.

Group 3 is the toughest, of course; but all that is needed is a reasonable compromise, how much of taxes already collected would be returned to the taxpayer as a “start-up” balance in his account… because it would not be mandatory to switch to the private option. Every individual (or family) in Group 3 would have to decide which choice is best for him (them).

And of course, Congress will see a battle royal about how to fund the transition. But heck, the Democrats seem to be happy with only the least bit of hand-waving about how to pay for the government option — ultimately, the full government control — of health care; so why should they kick at any temporary transition cost of allowing people to opt out of Medicare, Social Security, and the government-run school system?

In any event, the cost saving of a private option is much more easily calculated than the cost of ObamaCare: Fewer people in Medicare and Social Security mean less money spent; fewer kids attending government schools mean states can consolodate and close some of them. And in both cases, a bunch of bureaucrats at all levels of government can be told to find honest work instead. Not that any of this would happen — but that’s a separate issue, the tragedy of immortal bureaucracy.

However, there is one killer argument that would persuade every Democrat in Congress, even the Blue Dogs, to vote against the private option: Demand for such a private option would eventually overwhelm the public programs, which would eventually dissipate into desuetude: Eventually, nobody in his right mind would stick with the lousy government plan, when he has the option of a much better private plan for the same money.

But of course, accepting that argument means accepting the corollary: The only way that a government option in health care could “complete” with private health-insurance (group or individual) would be for the government “option” to cheat… to take unfair advantage of the fact that the federal plan gets to write the rules for its competitors — and it gets to operate at a loss so catastrophic, it would bankrupt any private company.

So Democrats have shot themselves in their own petard. Let’s call their bluff by proposing an increase of liberty in areas of government monopoly to balance out the Democrats’ demand for more totalitarianism in areas dominated by the private sector. Fair enough?

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Group 3 is the toughest, of course; but all that is needed is a reasonable compromise, how much of taxes already collected would be returned to the taxpayer as a “start-up” balance in his account… because it would not be mandatory to switch to the private option. Every individual (or family) in Group 3 would have to decide which choice is best for him (them).